BPInsights: November 15, 2019

BPInsights: November 15, 2019

Top of the Agenda

Lawmakers Pursue Legislation to Limit Tech Moves Into Banking

Lawmakers in the House and Senate announced legislation this week to curb tech companies’ expansion into the banking system through the industrial loan company (ILC) loophole. In the House, Representative Chuy Garcia (D-IL) plans to introduce a series of bills to address consumer protection concerns sparked by tech’s expansion, according to a report from Politico. “The draft legislation rightly reflects growing concerns about tech firms attempting to exploit loopholes to gain access to consumers’ financial data in addition to personal data that they already control — a potent mix,” said Greg Baer, president and CEO of BPI, of the Garcia draft bill that would eliminate the ILC loophole. Politico also reported that Senator John Kennedy (R-LA) also announced legislation to close the ILC loophole.

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5 Stories Driving the Week

1. Fed Chairman Powell Says Aspects of Bank Rules May Affect Reserve Liquidity

At a House Budget Committee hearing on November 14, Federal Reserve Chairman Jerome Powell said due to the recent turmoil in the repo markets, changes to regulations could be made to allow liquidity to move through the system. “There may be aspects of our supervisory and regulatory practice that we can look at that would allow the liquidity that we have, which we think is appropriate, to flow more freely in the system without though undermining safety and soundness,” Powell said. In a September 26 blog post, BPI’s Chief Economist Bill Nelson and Head of Research Francisco Covas detailed how regulations are preventing banks from playing a more active role in fixing market dislocations in the repo market.

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2. OCC Pledges to Release CRA Proposal in December, Fed Looks for Common Answer

On November 14, Comptroller of the Currency Joseph Otting told the Wall Street Journal that the agency plans to release its proposed rewrite of the Community Reinvestment Act sometime in December, though other agencies have yet to sign on. Under the OCC proposal, “banks would be encouraged to make loans to lower-income borrowers based on the geographic concentrations of their deposits, in addition to the locations of their physical branches,” Otting said in the Journal interview. “At this point in time, we’ve just got to move forward,” Otting said. At a Joint Economic Committee hearing on November 13, Federal Reserve Chairman Jerome Powell said the agencies have been working to try to find common ground but have not gotten there yet. “We’re going to keep trying, though, and my hope is that we will ultimately be able to come together with a common answer,” Powell said.

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3. Banks Set Terms on Data Sharing Agreements with Fintechs

The Clearing House announced on November 12 that it has developed a model agreement for banks looking to sign data-sharing agreements with fintech startups. The agreement is “meant to provide a common foundation of generally accepted terms as a starting point to facilitate data-access agreements between banks and fintechs, reducing the need to negotiate the same terms each time two parties enter into an agreement,” The Clearing House wrote in a press release announcing the agreement. The model agreement is part of a broader industry initiative to end “screen-scraping,” which requires consumers to give their credentials to outside apps.

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4. Banks Want Overhaul of 40-Year Old CAMELS Rating System

American Banker reported on the Federal Reserve and FDIC’s request for input to update the CAMELS rating system. Banks receive total combined scores and individual scores in five areas: capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to market risk, collectively referred to as CAMELS. American Banker reported that by providing specific feedback, commenters could risk revealing details about a process that is supposed to be secret. But Greg Baer, the president and CEO of BPI, said a better CAMELS process should enable examiners to be more mindful of a bank’s need to comply with rules, so banks should not worry about commenting. “It’s not faulting your examiner to say that in evaluating the bank’s liquidity, you should look at whether it’s in compliance with a liquidity coverage ratio, which the current standards don’t consider,” he said.

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5. BPI Chief Economist Bill Nelson Participated in a Panel at Cato Institute’s 37th Annual Monetary Conference

On November 14, BPI Chief Economist Bill Nelson participated as a panelist at the Cato Institute’s 37th Annual Monetary Conference. In his remarks, Nelson argued that the Fed’s pre-crisis monetary policy implementation framework was well-suited to a free society but several critical decisions drove the Fed to its current framework, largely due to unintended and unforeseen consequences. He then described how the Fed can return to conducting policy in its pre-crisis manner.

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In Case You Missed It

Basel Releases Consults on Market Risk and Sovereign Exposure Disclosure Templates
On November 14, the Basel Committee released two consultative documents relating to its Pillar 3 framework, which prescribes public disclosures to promote market discipline. The first document makes several adjustments to the framework governing market risk disclosure to account for changes made in January 2019 to Basel’s market risk capital framework. The second document proposes a template for voluntary disclosure of banks’ sovereign exposures. Comments on both documents are due February 14.

Federal Reserve Seeks Comment on Proposal to Extend Compliance Dates for Foreign Banks
On November 8, the Federal Reserve released for public comment a proposal to extend by 18 months the initial compliance dates for foreign banks to comply with the single-counterparty credit limit rule (SCCL). The Fed said the extension would provide additional time for foreign jurisdictions’ versions of the rule to become effective and would apply only to the combined U.S. operations of the foreign banks and not to any U.S. intermediate holding companies of those banks. In June 2018, the Fed finalized the single-counterparty credit limit rule to limit the exposure that a large domestic or foreign bank would have to another counterparty.

IIF Releases Paper on Value of Cross-Border Banking and Cost of Fragmentation
On November 13, the Institute of International Finance (IIF) released a staff paper that evaluates the benefits of cross-border banking for macroeconomic stability, diversification and economic growth particularly in developing economies. While the IIF acknowledges that regulators must effectively manage the additional complexity introduced to the financial system by cross-border banking, they find that international banking encourages growth and credit access, increases bank resilience by diversifying bank balance sheets, and makes much-needed capital and liquidity available to host country banking systems in times of crisis. Further, they argue that cross-border banking has a net benefit for the financial system and economy and suggest several policy measures to enable regulators to maximize these benefits and avoid harmful fragmentation.

EU Officials Signal Latest-Possible Basel Implementation, Less Burdensome Output Floor
On November 11, the European Commission’s Vice President for Financial Regulation, Valdis Dombrovskis, announced that the European Commission will propose legislation implementing Basel IV reforms in the second quarter of 2020. He said for all banks to compete fairly in a stable global financial system, it is essential that all major jurisdictions implement all key elements of the Basel agreement. On November 12, however, Bloomberg reported that European banks are seeing an opportunity to lobby EU policymakers for additional discretions in order to be less adversely impacted.

Financial Action Task Force Release Guidance on Digital Identity Technology of Customers
On October 31, the Financial Action Task Force (FATF) published draft guidance on the use of digital identity technology for identifying and verifying customers, and conducting ongoing due diligence, under the FATF’s customer due diligence expectations. The guidance’s main purpose is to assist regulatory agencies and financial institutions with their application of the risk-based compliance approach to digital identity technology. The draft standards are largely based on current frameworks, primarily those established by the European Union’s 2014 Regulation on electronic identification and trust services for electronic transactions in the internal market and NIST’s digital ID guidelines in the U.S.

Basel Releases Guidance on Interaction of Prudential and AML Supervision
On November 8, the Basel Committee on Banking Supervision released new guidelines for public comment aimed at the interaction and cooperation between prudential and anti-money laundering/countering the financing of terrorism (AML/CFT) supervision. The proposed guidelines seek to enhance previous guidance on “sound management of risks related to money laundering and financing of terrorism” by adding additional direction to both prudential supervisors and AML/CFT supervisors on cooperation, with an emphasis on cross-border information sharing. The proposed guidelines seek to promote interagency information sharing, without duplication and while limiting the scope of information to that which is already in possession of the relevant agencies.

Proposed Bill Aims to Limit Consumer Loan Rates To 36%
On November 12, a group of lawmakers introduced legislation to limit interest rates on consumer loans nationally to 36 percent, according to a report by the Wall Street Journal. The legislation, introduced in both chambers of Congress, would extend to all consumers an interest-rate limit already in place for the military.

Federal Reserve’s Rosengren Pushes for Raising Capital Buffers
In a speech on November 11, Federal Reserve Bank of Boston President Eric Rosengren argued that increased financial and macroeconomic risks—both the product of low interest rates— justify raising capital requirements.  He said policymakers should explore ways to prevent the buildup of leverage in a low-interest rate environment. “I am not sure that recent developments and proposals in bank regulation properly reflect the risks we are likely to face in a low-interest rate environment that challenges bank profitability and provides less by way of monetary policy buffers…capital buffers should be rising now so that there is more room for them to decline if the economy falters,” Rosenberg said. BPI staff has previously written why the argument that the countercyclical capital buffer (CCyB) should be raised in be “good times” is based on a misunderstanding of the role of the CCyB and other capital requirements.

CFPB Releases Financial Well-Being Report
The Consumer Financial Protection Bureau issued a report of state-by-state comparisons of financial well-being scores. The scores quantify a person’s underlying level of financial well-being on a standardized number between 0 and 100. The report also examines financial well-being by age groups and shows how patterns vary by states.

Upcoming Events

  • 12/05/2019 — Brookings Institution Event on “Repo Market Disruption” with BPI’s Bill Nelson Among the Speakers
  • 11/19/2019 — FDIC Board Meeting
  • 11/19/2019 — The Clearing House + BPI 2019 Annual Conference: The Clearing House and BPI will host the 2019 Annual Conference from November 19 to 21.  The event provides a forum for the industry’s leaders to examine the changing dynamics of the bank regulatory and payments’ landscapes with two and half days of high-level keynote speakers, in-depth expert panels, and networking. Registration is now closed.
  • 11/19/2019 — House Financial Services Hearing on Practices of Private Funds 
  • 11/20/2019 — Senate Banking Nomination Hearing 
  • 11/20/2019 — House Financial Services Consumer Protection Subcommittee Hearing on Minority Depository Institutions
  • 11/20/2019 — House Financial Services Housing Subcommittee Hearing on Health and Safety of HUD Housing
  • 11/21/2019 — House Financial Services Subcommittee Hearing Titled “Banking on Your Data: The Role of Big Data in Financial Services”

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